Reverse Mortgages and Short Sales
Unlike a typical forward mortgage, in which the homeowner makes payments toward the principal and interest, a reverse mortgage allows owners age 62 or older to use the equity in their homes to receive cash without having to make any payments. Generally, the reverse mortgage becomes due and payable when the homeowners on the loan no longer occupy the residence. If the homeowners sell the home, for instance, the reverse mortgage must be paid off. Unfortunately, sometimes reverse mortgage borrowers are unable to sell their home for a large enough amount to cover the reverse mortgage. In these cases, a short sale may be allowed.
What is a Short Sale?
A short sale is a real estate sale in which the lender who owns the mortgage agrees to let the borrower sell the home for less than what he or she owes on the loan. While most lenders are reluctant to agree to short sales because it will mean they have to take a loss, there are some instances where a lender will allow it. Usually, lenders are more likely to agree to a short sale when they think it will keep them from experiencing a greater loss. For example, if a homeowner with a reverse mortgage of $200,000 can only sell the home for its current market value of $100,000, the lender may decide to approve a short sale agreement because they figure $100,000 is better than nothing. Short sales are also less costly than foreclosures, so if a reverse mortgage borrower is at high risk for foreclosure, a short sale may be the most beneficial option for everyone involved.
How to Prepare for a Short Sale on Your Reverse Mortgage
Because reverse mortgages are insured by the FHA, you may need to have an FHA appraisal before your lender can approve the short sale agreement. You may also need to show evidence of financial hardship (loss of benefits, death in the family, etc.) in order to get approved for a short sale on your reverse loan.
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When Foreclosure May Make More Sense
Remember that foreclosures aren’t ideal for lenders or borrowers, whether they’re reverse or forward mortgages. If you are able to show your lender that you’re prepared to go through a short sale, but will go through a foreclosure if you must, you may be in a good bargaining position with your lender. In many cases, your lender will want to work something out with you in order to keep from experiencing a substantial financial loss. However, if you aren’t able to get your lender’s approval for a short sale on your reverse mortgage, foreclosure may be the only other option.
Sometimes, foreclosure makes the most sense. For example, if you have inherited a reverse mortgaged home, perhaps from a parent or grandparent, it might be more reasonable to allow the lender to foreclose instead of attempting a short sale. Heirs who inherit reverse mortgaged homes aren’t liable for the mortgage in the first place, so there should be no financial or credit ramifications for the heirs.
Short sales also require a lot of time (contrary to their name), whereas foreclosures are generally handled completely by the lender, which frees the homeowner or heir from the added burden. Depending on your situation, foreclosure may be a better option. However, you should consult with a mortgage expert or financial adviser before making any final arrangements.
For more information on reverse mortgages, give us a call at (855) 367-4326.